[Federal Register Volume 77, Number 67 (Friday, April 6, 2012)]
[Notices]
[Pages 20854-20858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8271]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66713; File No. SR-EDGX-2012-08]
Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of
Filing of Proposed Rule Change Relating to Amendments to Rule 2.11 That
Establish the Authority To Cancel Orders and Describe the Operation of
an Error Account
April 2, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 22, 2012, EDGX Exchange, Inc. (``Exchange'' or ``EDGX'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 2.11 to (1) add a new
subparagraph (a)(6) that addresses the authority of the Exchange and
its routing broker-dealer, Direct Edge ECN LLC d/b/a DE Route (``DE
Route'') to cancel orders if and when a systems, technical or
operational issue (herein, each individually referred to as a ``Systems
Issue,'' and collectively referred to as ``Systems Issues'') occurs,
and (2) amend subparagraph (a)(4) and add new subparagraph (a)(7) to
describe the operation of an error account for DE Route. The text of
the proposed rule change is available on the Exchange's Web site, at
the Exchange's principal office and in the Public Reference Room of the
Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 2.11 by adding subparagraph
(a)(6) to address the authority of the Exchange and DE Route to cancel
orders when a Systems Issue occurs, and by amending subparagraph (a)(4)
and adding subparagraph (a)(7) to describe the
[[Page 20855]]
conditions under which DE Route may maintain and use an error
account.\3\
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\3\ DE Route is a facility of the Exchange. Accordingly, under
Exchange Rule 2.11(a)(1), the Exchange is responsible for filing
with the Commission rule changes and fees relating to DE Route's
outbound router function. In addition, EDGX is using the phrase
``the Exchange or DE Route'' in this rule filing to reflect the fact
that a decision to cancel orders affected by Systems Issue may be
made by the Exchange or DE Route depending on where those orders are
located at the time of that decision.
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DE Route is the approved outbound router of EDGX,\4\ subject to the
conditions listed in Rule 2.11. EDGX relies on DE Route to provide
outbound routing services from EDGX to external market centers (each, a
``Trading Center'' \5\). The Exchange has also been approved to receive
inbound routes of equities orders by DE Route from EDGA Exchange, Inc.
for a pilot period ending on June 30, 2012.\6\ When DE Route routes
orders to a Trading Center, it does so by sending a corresponding order
in its own name to the Trading Center. From time to time, the Exchange
and DE Route encounter situations in which it becomes necessary to
cancel orders and resolve an error position.\7\
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\4\ See Securities Exchange Act Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010).
\5\ As defined in EDGX Rule 2.11(a) and Rule 600(b)(78) of
Regulation NMS under the Securities Exchange Act of 1934 (the
``Act''), 17 CFR 242.600(b)(78).
\6\ See Release No. 61698 at n. 4. See also Securities Exchange
Act Release No. 64361 (April 28, 2011), 76 FR 25388 (May 4, 2011)
(SR-EDGX-2011-12); see also SR-EDGX-2012-09 (March 16, 2012)
(pending filing to extend the pilot period through June 30, 2013).
\7\ The examples described in this filing are not intended to be
exclusive. Proposed subparagraph (a)(6) of EDGX Rule 2.11 would
provide general authority for the Exchange or DE Route to cancel
orders in order to maintain fair and orderly markets when Systems
Issues are occurring, and proposed subparagraph (a)(7) of Rule 2.11
would set forth the manner in which an error position may be handled
by DE Route. The proposed rule changes are not limited to addressing
order cancellation or an error position resulting only from the
specific examples described in this filing.
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Circumstances That Could Lead to Cancelled Orders
A Systems Issue may arise at DE Route, a Trading Center or the
Exchange that may cause the Exchange or DE Route to take steps to
cancel orders if the Exchange or DE Route determines that such action
is necessary to maintain a fair and orderly market. The examples set
forth below describe some of the circumstances in which the Exchange or
DE Route may decide to cancel orders.
Example 1. If DE Route or a Trading Center experiences a Systems
Issue that results in DE Route not receiving responses to immediate
or cancel (``IOC'') orders that it sent to the Trading Center, and
that issue is not resolved in a timely manner, DE Route may need to
cancel the routed orders affected by the issue.\8\ For instance, if
DE Route experiences a connectivity issue affecting the manner in
which it sends or receives order messages to or from Trading
Centers, it may be unable to receive timely execution or
cancellation reports from the Trading Centers, and DE Route may
consequently seek to cancel the affected routed orders. Once a
decision is made to cancel those routed orders, any cancellation
that a Member submitted to the Exchange on its initial order during
such a situation would be honored.\9\
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\8\ In a normal situation (i.e., one in which a Systems Issue
does not exist), DE Route should receive an immediate response to an
IOC order from a Trading Center, and would pass the resulting fill
or cancellation on to the Member. After submitting an order that is
routed to a Trading Center, if a Member sends an instruction to
cancel that order, the cancellation is held by the Exchange until a
response is received from the Trading Center. For instance, if the
Trading Center executes that order, the execution would be passed on
to the Member and the cancellation instruction would be disregarded.
\9\ If a Member did not submit a cancellation to the Exchange,
however, that initial order would remain ``live'' and thus be
eligible for execution or posting on the Exchange, and neither the
Exchange nor DE Route would treat any execution of that initial
order or any subsequent routed order related to that initial order
as an error position.
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Example 2. If the Exchange experiences a Systems Issue, the
Exchange may take steps to cancel all outstanding orders affected by
that issue and notify affected Members of the cancellations. In
those cases, the Exchange would seek to cancel, via DE Route, any
routed orders related to the Members' initial orders.
Circumstances That Could Lead to an Error Position
An error position can arise out of Systems Issues experienced by DE
Route, the Exchange or a Trading Center. Connectivity and order
processing related issues are the most common types of Systems Issues
that DE Route would expect could result in an error position.
Connectivity issues, for example, would entail problems with the manner
in which DE Route sends or receives order, execution and cancellation
messages to or from other Trading Centers. Connectivity issues could
arise either from DE Route's systems or from the Trading Center's
systems. For example, if DE Route's connection to a Trading Center is
interrupted after delivering an order, DE Route may be unable to
receive a timely execution report from the Trading Center, and as a
consequence may cancel the Member's order. But DE Route may later
discover after the connection was restored that the order was actually
executed by the Trading Center, resulting in an error position.
Similarly, if the Trading Center attempted to cancel all open orders
that it had previously accepted due to a Systems Issue, but either
transmitted cancellations on orders that had previously been executed,
or subsequently submitted executions of the orders to The Depository
Trust Clearing Corporation (``DTCC'') for clearance and settlement, an
error position would result.
An error position might also result if DE Route failed to process
order messages correctly. For example, if DE Route's connection to the
Exchange is temporarily interrupted and DE Route were to erroneously
re-route orders that had previously been executed after the connection
was restored, DE Route will have received executions of orders where
there were effectively no corresponding orders on the Exchange. In this
case, the executions would not necessarily be nullified since DE Route
is a regular member of other Trading Centers and is therefore subject
to those venues' policies for honoring trades.\10\
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\10\ See, e.g., Nasdaq Rule 4627 (stating that all members must
honor trades); BATS Rule 11.15(b); and NSX Rule 11.17(b) (both
stating that transactions are locked-in and automatically processed
for clearance and settlement).
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A Systems Issue experienced by the Exchange could also result in an
error position relating to a routed order. For example, if an order
were routed from the Exchange to a Trading Center by DE Route, and then
due to a Systems Issue the Exchange would not accept the resulting
execution of the order (but rather transmitted a cancellation to the
Member instead), an error position would result. Another example might
be where a Systems Issue experienced by the Exchange automatically
changed the number of shares associated with all orders from one or
more Members, or all orders in one or more symbols (in either case
resulting in overfills), or changed the symbol on one or more orders
(resulting in executions in the wrong stocks), where such orders were
routed by DE Route to a Trading Center for execution.\11\
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\11\ This discussion of potential scenarios that could lead to
an error position is not intended to be an exhaustive list of all
scenarios, but rather is just illustrative. The Exchange cannot
anticipate every scenario, but does acknowledge that the types of
error positions that might warrant use by DE Route of an error
account would be limited to those arising from Systems Issues, as
defined herein, which resulted in erroneous executions occurring on
one or more Trading Centers.
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Assignment Methodology
Regardless of how an error position arose, DE Route would not
typically learn about an error position until the next business day
following the trade date, usually (but not exclusively) during the
clearing process when a Trading Center has submitted to DTCC a
transaction for clearance and
[[Page 20856]]
settlement of which DE Route had not received an execution
confirmation. Nonetheless, if DE Route reasonably determines that it
has accurate and sufficient information, and a sufficient amount of
time, it will assign the full amount of the resulting error position to
one or more Members. For example, if Member A placed an order to buy
100 shares of symbol XYZ, and a Systems Issue caused DE Route to route
an order for the wrong number of shares (e.g., 1000 shares), or route
an order for the correct number of shares but in the wrong symbol
(e.g., symbol XYY instead of XYZ), then, in either situation, DE Route
would assign to Member A the full amount of the resulting error
position (in the above examples, 1000 shares of XYZ, of which 900
shares would be the error position, or 100 shares of XYY,
respectively). Under these circumstances, because the error position
would have been caused by an Exchange or DE Route's Systems Issue,
Member A would be permitted to submit a claim for reimbursement
pursuant to EDGX Rule 11.12 to the extent that Member A incurred a loss
after trading out of the error position.
The foregoing assignment methodology is designed to ensure that an
error position is assigned to Members in a non-discriminatory manner.
Thus, if DE Route reasonably concludes that it is unable to trace each
erroneous execution comprising an error position back to one or more
Members' orders, then DE Route will assume the entire amount of the
error position in the error account. Moreover, if DE Route reasonably
concludes, due to the number of erroneous executions and/or the number
of Members potentially impacted, that it would not be able to trace
each erroneous execution comprising an error position back to such
Members in a timely manner (which will be defined to mean by the first
business day following the trade date on which the error position was
established, or ``T+1''), then DE Route will assume the entire amount
of the error position in the error account. When an error position is
acquired into DE Route's error account, it will then be liquidated as
soon as practicable pursuant to proposed paragraph (a)(7) of Rule 2.11.
Proposed Changes to Exchange Rule 2.11
The Exchange proposes to amend EDGX Rule 2.11 to amend subparagraph
(a)(4) and add new subparagraphs (a)(6) and (a)(7) to address the
cancellation of orders due to Systems Issues and the use of an error
account by DE Route, respectively.
Specifically, under proposed subparagraph (a)(6), the Exchange or
DE Route would be expressly authorized to cancel orders as may be
necessary to maintain fair and orderly markets if a Systems Issue
occurred at the Exchange, DE Route or a Trading Center.\12\ The
Exchange or DE Route would be required to provide notice of the
cancellation to affected Members as soon as practicable.
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\12\ Such a situation may not cause the Exchange to declare
self-help against the Trading Center pursuant to Rule 611 of
Regulation NMS under the Act. If the Exchange or DE Route determines
to cancel orders routed to a Trading Center under proposed
subparagraph (a)(6), but does not declare self-help against that
Trading Center, the Exchange would continue to be subject to the
order protection requirements of Rule 611 with respect to that
Trading Center.
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Under amended subparagraph (a)(4) and new subparagraph (a)(7), DE
Route would be authorized, when providing routing services to the
Exchange, to maintain an error account for the purpose of liquidating
an error position acquired as a result of Systems Issues experienced
either by DE Route itself, the Exchange or at a Trading Center, as
described above. The rule amendments provide that DE Route would only
assume an error position in the error account under documented
circumstances when the error position could not fairly and practicably
be assigned to one or more Members.
With proposed new subparagraph (a)(7) of Rule 2.11, the Exchange is
proposing that DE Route would consider the following factors in
determining whether the entire amount of an error position can be
fairly and practicably assigned to one or more Members: (i) Whether DE
Route has accurate and sufficient information to trace each erroneous
execution comprising an error position back to one or more Members'
orders; and (ii) whether DE Route is able to review available
information in order to assign the entire amount of an error position
to all affected Members by the first business day following the trade
date on which the error position was created (considering, among other
factors, the size of the error position and the total number of Members
potentially impacted). If as a result of the foregoing, DE Route
reasonably concludes that the entire amount of an error position can be
assigned to one or more Members in a timely and non-discriminatory
manner, the entire amount of the error position will accordingly be
assigned to such Members.\13\ An example of this might be where a
Systems Issue of limited scope or duration occurred at a Trading
Center, and the resulting trades submitted for clearance and settlement
by such Trading Center to DTCC, coupled with the number of Member
orders transmitted during that same time period or possessing similar,
traceable characteristics, are adequately manageable so as to allow a
sufficient amount of time to match the error position with Members'
orders in a non-discriminatory fashion.
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\13\ See examples listed under the section entitled ``Assignment
Methodology,'' supra.
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There may be scenarios, however, in which the entire amount of a
particular error position resulting from a Systems Issue cannot be
assigned to Members, or cannot be assigned to Members in a non-
discriminatory manner. For example, in the event that there is
insufficient and/or inaccurate information, or the routed order that
led to an erroneous execution could not be attributed to a Member's
order, then DE Route would not be able to trace erroneous executions
back to a Member's order. Also, if the information available would
enable tracing of some, but not all, of the erroneous executions
comprising an error position to Members, then the Exchange believes
that assigning only a portion of an error position to Members might
unfairly discriminate against those Members. In these circumstances,
therefore, DE Route may reasonably conclude, pursuant to the factors
set forth in proposed Rule 2.11(a)(7), that it cannot assign the entire
amount of an error position to one or more Members, or cannot assign it
in a non-discriminatory manner, and must instead acquire the entire
amount of the error position into the error account.
There may also be scenarios in which the entire amount of a
particular error position resulting from a Systems Issue cannot
practicably be assigned to Members in a timely manner. For example, the
number of erroneous executions comprising an error position, and/or the
number of Members potentially impacted, could be such that the research
necessary to trace all of the erroneous executions comprising the error
position back to particular Members' orders could reasonably be
expected to extend beyond T+1. The Exchange believes that assigning an
error position to a Member beyond T+1 significantly increases the
potential for disruptions in the normal clearance and settlement
process,\14\ and also could result in adverse regulatory consequences
for affected Members (e.g., their compliance with Rule 15c3-
[[Page 20857]]
1 under the Act). In these circumstances, therefore, DE Route may
reasonably conclude, pursuant to the factors set forth in proposed Rule
2.11(a)(7), that it is not practicable to assign the entire amount of
an error position to one or more Members by T+1, and must instead
acquire the entire amount of the error position into the error account.
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\14\ Specifically, the Exchange believes that the likelihood of
erroneous executions failing to settle within the normal clearance
and settlement cycle would increase the closer in time to the
settlement date that the error position was assigned to a Member.
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DE Route would be required to document the factors considered in
determining to assume an error position in the error account.
Similarly, if DE Route determined that an error position could be
assigned to a particular Member in a timely fashion, then DE Route
would be required to document the rationale for the assignment to that
Member. The assignment of any error position to any one or more Members
would be required to be done in a non-discriminatory fashion; this
includes, for example, that the entire amount of an error position must
be assigned to all Members to which such position could reasonably be
attributed. If time would not permit a full analysis of all Members to
which a position could be attributed, then DE Route would not assign
any portion of the error position to Members, but would rather have to
assume the error position in its error account. Documentation
reflecting assignment of an error position to one or more Members shall
reflect such methodology.
Proposed subparagraph (a)(7) would further describe the manner in
which DE Route would liquidate an error position from the error
account. When, as and if DE Route determined to book an error position
to its error account, DE Route would be required to liquidate such
error position as soon as practicable in a manner that would
effectively confer investment discretion over the error position to a
third-party broker-dealer. Specifically, DE Route would be required to:
(i) Provide complete time and price discretion to the third-party
broker-dealer in the liquidation of the error position, including that
it would not be permitted to exercise any influence or control over the
timing or methods of trading; and (ii) establish and implement written
policies and procedures in accordance with paragraph (a)(7) that are
reasonably designed to restrict the flow of any confidential and
proprietary information associated with the liquidation of an error
position between the Exchange and DE Route, on one hand, and the third-
party broker-dealer, on the other.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the objectives of Section 6 of the Act,\15\ in general, and
furthers the objectives of Section 6(b)(5),\16\ in particular, as it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest, and is not
designed to permit unfair discrimination between customers, brokers or
dealers. The Exchange believes that this proposal is in keeping with
those principles since the Exchange's and DE Route's ability to cancel
orders as a result of a Systems Issue and to maintain an error account
facilitates the smooth and efficient operations of the market.
Specifically, the Exchange believes that allowing the Exchange or DE
Route to cancel orders as a result of a Systems Issue would allow the
Exchange to maintain fair and orderly markets. Moreover, the Exchange
believes that allowing DE Route to assume a bona fide error position in
an error account, and to liquidate the error position subject to the
conditions set forth in the proposed amendments to Rule 2.11, would be
the least disruptive means to correct the error position, except where
it is practicable for DE Route to assign an error position to one or
more Members of the Exchange. The proposed amendments are designed to
ensure full trade certainty for market participants and avoid
disrupting the clearance and settlement process. The proposed
amendments are also designed to provide a consistent methodology for
handling an error position in a manner that does not discriminate among
Members. Finally, the proposed amendments are also consistent with
Section 6 insofar as they would require DE Route to establish controls
that are reasonably designed to restrict the flow of any confidential
information associated with the liquidation of an error position
between the Exchange and DE Route, on one hand, and the third-party
broker-dealer, on the other.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove such proposed rule change; or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-EDGX-2012-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-EDGX-2012-08. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's
[[Page 20858]]
Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EDGX-2012-08 and should be submitted on
or before April 27, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8271 Filed 4-5-12; 8:45 am]
BILLING CODE 8011-01-P